US 10-year yield hits 3pc as economy shows resilience

NEW YORK: The US benchmark 10-year Treasury yield rose to 3 percent for the first time in more than four years on Tuesday, reflecting the durability of the US economic expansion and stoking views the three-decade-old bull market in bonds is coming to an end.

Used as a global yardstick for interest rates on everything from home loans to corporate bonds, the 10-year yield's breach of the key level was also seen as spelling trouble for riskier assets that have boomed during the post-financial crisis era of rock-bottom rates.

The bond market's accelerating sell-off since late last week has stemmed from inflation worries caused by rising commodity prices and growing Treasury supply, as well as bets the Federal Reserve would further raise key borrowing costs, analysts said.

"That we're at a point that we can start to sustain some rises in bond yields speaks to confidence in the economy. And that's what is really critical at this point is to follow the Fed's lead in terms of talking about policy normalization," said Willie Delwiche, investment strategist at Baird in Milwaukee.

Tuesday's data on US consumer confidence and new home sales, both stronger in April, bolstered the case that the economy will continue to grow in the coming quarters.

Some analysts argued that rising bond yields, which mortgage and other loan rates are based on, would increase borrowing costs for consumers and businesses, undoing much of the expected benefits from last year's US tax overhaul. Banks and other companies also have seen their short-term borrowing costs rise due to the Fed's rate hikes.

The 10-year yield's breach above 3 percent added to Wall Street's woes on Tuesday. The three major US stock indexes closed down more than 1 percent.

"We are heading in a direction that is uncomfortable for other assets that have benefited from a low-rate environment," said George Goncalves, head of US rates strategy at Nomura Securities International in New York.

The 10-year Treasury yield first topped 3 percent in midmorning trade and then pulled back as stocks faltered. It regained that threshold in late afternoon. The 10-year yield last breached 3 percent in January 2014.

The 2-year yield touched 2.500 percent, which was last seen in September 2008 before subsiding to 2.470 percent, down 0.4 basis point on the day.

Analysts are not sure how much further the 10-year yield will climb.

If the 10-year yield were to rise to 3.25 percent or higher, investors may shift more money into Treasuries from stocks and other risky assets. If it were to stall at current levels, investors will likely stick with their current allocations, analysts said.

On the supply front, the Treasury Department sold $32 billion in 2-year notes in mediocre demand at a yield of 2.498 percent, the highest since July 2008.

It will offer $35 billion of 5-year securities on Wednesday along with $17 billion in 2-year floating-rate notes. It will auction $29 billion of 7-year debt on Thursday.